Published by EH.NET (February 2002) 
Geoffrey Poitras, _The Early History of Financial Economics, 1478-1776 - 
 From Commercial Arithmetic to Life Annuities and Joint Stocks_. Cheltenham - 
Edward Elgar, 2000. x + 522 pp. $120 (cloth), ISBN: 1-84064-455-9. 
Reviewed for EH.NET by Salim Rashid, Department of Economics, University of 
Illinois. <[log in to unmask]> 
 
This book aims at providing an introduction to the history of finance, more 
properly financial mechanisms, from the fifteenth through the eighteenth 
centuries. Poitras makes no claim to be presenting original research; 
rather he is concerned with a synthesis of the historical literature on 
finance and economics. Beginning with the nature of Scholastic and 
'Mercantilistic' economic thought, the text takes us through the 
institutional changes and the conceptual developments they fostered over 
the next four centuries. The expository plan is easy to follow, since it 
follows the historical timeline and stops to describe various institutional 
changes brought on by the growth of the European economies. 
 
This book should have a ready market. Many who begin with economics, 
gravitate silently to finance and many others have no need of the 
transition. The easy exposition and the portrayal of the historical 
developments make this useful supplementary reading; with a text of 
original writings, it could serve as a good introductory text in the 
history of finance. The reproductions of several pages of original text 
provide the text with an authentic flavor. In most places, the book has 
much 'fun' stuff to read. 
 
Unfortunately, the author has not written with one audience consistently in 
mind. Some aspects of the presentation will lose many potential readers. On 
many occasions, the concepts are not introduced clearly. For example, while 
there is much dicussion of bills of exchange, there is no benchmark 
definition. There are two major difficulties with the expository method 
chosen; the reader will silently assume that bills of exchange were the 
same across Europe at any point in time, and that they remained the same 
over time. (If indeed there were no such locational differences or changes 
over the centuries, this is a remarkable fact and needs prominence.) In 
keeping with the purpose of the book, there should have been actual 
photographic reproductions of bills of exchange through the ages. A short 
numerical example should precede the definition. Thus: "Here is a problem 
faced by Merchant X in Bruges... In order to solve this problem, the 
following piece of paper is drafted as a legally enforceable document.... 
This is how the above document solves the problem.... The analytical 
concepts needed to understand this solution are...." Students, and readers 
like myself, would be much benefited by such pages. To make room for them, 
items such as debates about the self-seeking behavior of the Church could 
be made into footnotes or appendices. As it stands, the text gives the 
impression of someone who began by wanting to write a text on finance, but 
found the topic so closely related to the history of economics that he felt 
compelled to give equal time to both subjects. This is not fair because 
finance has a narrower scope and clearer analytical structure than 
economics. One does not have to sacrifice historical detail to achieve 
analytical clarity. Take the case of "fixed Income Valuation" on p 146. The 
first paragraph will not be necessary for those who know what this 
involves, while the novice will find it abrupt and unhelpful. In the middle 
of the next paragraph there is a clear definition of the analytical 
essentials: "Valuation requires knowledge of: the price, the size of the 
payment, the time period (term to maturity); and the interest (discount)." 
If this sentence were followed by the ponts made in the first paragraph on 
the need to use present values, we would have all the essentials described. 
Next, the historical treatment could show us which of these concepts were 
known and how they were utilized; finally, we could appreciate which 
problems were fully solved and which needed to await further theoretical 
development. Such a method would be helpful in many places throughout the 
book as, say, the description of "dry exchange" (p. 245). 
 
Models for the general reader do exist. Consider Poitras' treatment of the 
Triple or German contract (pp. 38-40) with that in _The Abuse of Casuistry_ 
(Albert Jonsen and Stephen Toulmin, Berkeley, University of California 
Press, 1988) -- a book whose intended audience is the general reader. The 
first move toward a new paradigm was the introduction of a theory of 
interest popularly referred to as the "triple contract," the "German 
contract," or the "5% contract." It marked a notable departure from the 
medieval thesis and opened the way for a modern theory of profit from 
loans." The name "triple contract" expressed the essence of the arrangement 
that Eck popularized. Partners entered into three distinct contracts with 
each other. First there was a contract of partnership, which was considered 
legitimate by all commentators. Second, a contract of insurance was signed; 
under this the investor was insured against a loss of his capital and, 
instead of paying a premium, agreed to accept a lesser percentage of the 
total profits than would otherwise come to him. Third, a contract was 
signed that guaranteed the investor was a "sort of debenture holder without 
industry or danger of losing capital." This was an attractive form of 
investment, which provided the active partner with considerable working 
capital. Commentators conceded that, if made with different parties, each 
of these three contracts would be legitimate, but most of them doubted the 
morality of the triple contract between two parties. (pp. 188-89) 
 
If the author plans a second edition, I hope he will look more at the 
financial instruments devised by Islamic finance in the period 800-1400 AD. 
The growth of world trade in this period is well covered in books such as 
those of Janet Abu-Lughod. The fact that the Italians devised the earliest 
financial instruments for Europe may not be unconnected with their close 
trading relations with the world of Islam. In looking at financial history, 
Adam Smith is less instructive than individuals like Lewes Roberts in the 
1640's and Malachy Postlethwayt in the 1760's. 
 
The current "Conclusion" has interesting speculations on what leads to fame 
in this area and why the contributions of "Anonymous" should figure largely 
in a history of finance. The book should perhaps end with a list of 
potential topics for future research. We know that the best mathematicians 
of this period were limited to using polynomials, and low order polynomials 
at that. How accurate were speculations with low order polynomials? If the 
speculations were more successful than we can expect on the basis of the 
explicit mathematical knowledge, does this then suggest that humans have 
much implicit or tacit knowledge, which they can use but cannot necessarily 
articulate? 
 
 
Salim Rashid is author of _Economic Policy for Growth: Economic Development 
Is Human Development_ (Kluwer 2000). His recent research asks "Can there be 
theory of money?" 
 
Copyright (c) 2002 by EH.Net. All rights reserved. This work may be copied 
for non-profit educational uses if proper credit is given to the author and 
the list. For other permission, please contact the EH.Net Administrator 
([log in to unmask]; Telephone: 513-529-2850; Fax: 513-529-3308). 
Published by EH.Net (February 2002). All EH.Net reviews are archived at 
http://www.eh.net/BookReview 
 
------------ FOOTER TO HES POSTING ------------ 
For information, send the message "info HES" to [log in to unmask]